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Mandatory arbitration: stupid employer trick

A growing number of employers are making employees sign agreements that require any disputes to be heard by an arbitrator instead of a court. (Usually the agreements say "any and all" disputes, even though once you say any, you've got all covered. Lawyers: "Why use one (1) word when you can use three (3)?" But I digress.)

The thinking behind mandatory arbitration is that it is faster and cheaper. The unspoken thinking behind it, especially for large employers, is that any given arbitrator is more likely to have future cases with the employer than with the particular employee, and the arbitrator wants the large employer to use him or her again in the future. I don't buy that, because it suggests that arbitrators will subvert a case to curry favor with a large employer. I believe most arbitrators are ethical, and would never do that.

But arbitration is not good for employers. (By the way, I'm only talking about employment arbitration — not labor arbitration involving unions, which is a whole 'nother kettle of fish.) And there are three reasons why:

The parties choose the arbitrator.But Jay, you say, this sounds like a good thing. It's not like you pick your judge in a court case. Isn't it good to have some control? You might think, and employers often do. But it's not. Here's why:

An arbitrator only gets a case when both sides agree to choose that arbitrator. (Well, duh, you say.) The way it works is that the American Arbitration Association or whatever group you're using gives you a list of a dozen or more available arbitrators. The company's lawyer and the employee's lawyer then pick a few acceptable choices from the list. When both sides find one they agree on, bingo — you got yourself an arbitrator.

And how does the lawyer choose? Based on his or her own experience with the arbitrators, the experience of friends and colleagues, and the arbitrators' general reputation. And now we come to the problem:

If an arbitrator has a reputation as being more employee friendly than employer friendly, I'm not going to pick him or her. (Again: duh.) And the converse is true, too. So an arbitrator has a built-in self-interest to come down the middle — to rule in favor of management and employees in roughly equal proportions. And that's the problem, because employees don't normally win half of the cases filed. For example, at the Massachusetts Commission Against Discrimination, employees win probable cause — that is, they get to proceed with their cases — only about five to fifteen percent of the time.

If an arbitrator was known to come out in favor of the employee only five to fifteen percent of the time, do you think any plaintiff's lawyer would agree to pick that arbitrator?

The only way to fix this problem is to remove the parties' ability to choose the arbitrator. Until that happens, avoid arbitration.

There are no rules of evidence or binding precedent.Some people incorrectly think that this streamlines the process, making an arbitration less complicated and expensive than a court case. But rules of evidence — while sometimes pesky and seemingly arcane — are designed to increase the chances that testimony and evidence reflect the truth. Hearsay rules, the bane of second-year law students and many litigators, were designed to weed out made-up testimony.

And binding precedent — the notion that earlier cases with greater authority control the current case — means that the parties know the rules beforehand. Without needing to follow precedent, arbitrators are free to come up with their own rules. While arbitrators universally try to be fair, their rulings can sometimes be ... well ... arbitrary.

Arbitral rulings are nearly impossible to overturn.Winning an appeal in court is very difficult. But short of misconduct or flagrant bias on the part of an arbitrator, it is next to impossible to get a court to overturn the arbitrator's decision.

Just last week, Ross Kerber of The Boston Globereported on MassMutual's attempt to get a court to overturn an unfavorable arbitral ruling. The story reports that the arbitration panel had concluded that ousted CEO Robert J. O'Connell had been unjustly terminated and that he was entitled to $50 million in severance benefits, even though it found that he had had affairs with two women (including the company's general counsel). The company sued in Suffolk Superior Court to have the panel's decision overturned. But the court declined, holding that there was "no evidence of any failings in the procedural aspects of the hearings." The court did not confirm that O'Connell should have won the arbitration; only that he did win.

The story reported that the company planned to appeal further. Good luck with that.

Mandatory arbitration of employment might sound like a good idea to employers. It's not. If you want to save money on employment disputes, consider mediation — a much more valuable ADR (alternative dispute resolution) technique.

* * * * *A bit of language trivia: The expression "a whole nother" (used above referring to the fish kettle) is an example of tmesis. It's like they have a name for everything.

Comments

Jay,
I blog (at Calbizlit) on a variety of litigation issues affecting businesses in California, including employment issues. I agree with your assessment that employers make a mistake to blindly pursue mandatory arbitration in employment matters, for two reasons: first, in non-punitive damages matters, arbitrators, particularly retired judges, can outstrip juries when it comes to generous awards. Judges have just seen too much. But more importantly, I can tell you as an employer, as well a lawyer, that trying to superimpose binding arbitration on an existing employment relationship casts a real pall over the employer / employee relationship.

Having said that, however, there are two features about binding arbitration, at least in California, that can't be discounted. First, California has a reasonably well thought out mechanism for having the trial courts appoint arbitrators. It appears at California Code of Civil Procedure section 1281.6. On motion of either side, the trial court names five prospective arbitrators. The parties have five days to agree on one of them. If they don't, the court selects one from the list of five. This eliminates the "vendor interest" problem you refer to in your posting.
But there's a more significant reason California employers want to force binding arbitration: it eliminates the high end for punitive damages in discrimination, retaliation and harassment cases. Arbitrators are simply less likely to render large punitive damages awards. And this, of course, is why we resist them when we represent employees.

Building on Bruce's point, why not use a voluntary arbitration provision, allowing either side to elect arbitration, rather than a mandatory provision? Employees rarely elect arbitration, so employers keep the option, which may be helpful in certain
circumstances such as class actions or where punitives are in play.